The news today is dominated by the story of how David Cameron supposedly exercised a veto to prevent Britain becoming involved in the German proposed treaty to set up a fiscal union.

Media reporting is wrong.  What happened was far more significant.  Cameron did not wield a veto.  Had he wielded a veto there would be no new treaty.  Instead there will be a new treaty only Britain will not be involved in it.

This is so extraordinary that I can only assume that what happened is that Cameron sought to wield a veto but was told by the others that if he did his veto would be simply ignored.  In other words Britain’s veto was overriden by the other EU states.  To disguise Britain’s humiliation Cameron is presenting what happened as his decision even though it was one that was forced on him. 

In other words Britain has to all intents and purposes been expelled from the inner councils of the EU.  Whatever happens next it is difficult to believe that the other member states will ever let it back.  Even if Britain were to elect a pro Europe Labour government it is doubtful that the other EU states would trust Britain’s long term commitment to Europe and the EU sufficiently ever to let it back.  Given that this is so one has to wonder for how much longer Britain will remain a member of the EU.

This is all pretty momentous and its implications for Britain, Europe and the world will take some time to think out.  I would however make just a  few preliminary points.

1. The new EU treaty will not create a fiscal union.  As I said in an earlier post, it merely re asserts the old Maastricht criteria in a far more stringent form.  EU states are now given deadlines to bring their debt to GDP levels down to 60% and will supposedly be obliged to limit their budget deficits over the lifetime of an economic cycle to just 0.5% of GDP.  All this is to be administered by the European Commission and enforced by the European Court of Justice.

Various commentators have correctly pointed out that this will impose unprecedented and indefinite austerity on Europe.  No commentator has so far pointed out that what is being proposed is actually impossible.  There is no possibility that the targets will be met.  Italy has been running a primary budget surplus for years and yet its debt to GDP level is still 120%.  How can it bring it down to 60% in anything like the kind of time frame that is being talked about?  Yet that by law is what Italy is now be obliged to do.  The same point can be made about all other EU states.

One has to wonder whether those involved in drawing up these targets have any idea what they are doing.  What they are doing is planting a bomb under the European project.  Not only will what is proposed fail but it also entirely fails to address or indeed show any understanding of the eurozone crisis, which is a banking not a sovereign debt crisis.  At the same time by using laws and treaties to impose targets that cannot be met the European leaders are ensuring that those laws and treaties will be broken.  Given that the EU system is ultimately no more than a web of laws and treaties creating arrangements that are bound to fail and which will result in those laws and treaties being broken all but guarantees that this web will unravel.  The people of Europe will in the meantime have to pay the price.

2. Cameron has presented his attempted use of the veto as intended to protect the financial community based in the City of London.  This is untrue.  There is nothing in the treaty that would have threatened the financial community of the City of London in any serious way.  The real reason for Cameron’s opposition is that he knows that the government and his leadership would not survive the inevitable backlash from euroskeptics.  

3. I have always known that there was a possibility that Britain might leave or be ejected from the EU.  The one thing I never expected is that it might happen under a government with Liberal Democrat ministers.  Unless they now act that is the position the Liberal Democrats might now find themselves in.


The European Central Bank must at the moment be the most unpopular institution in the world. 

At a press conference today Mario Draghi the President of the European Central Bank announced a further cut in interest rates.  He also said that the European Central Bank would not be stepping up its buying programme of eurozone government bonds.  This is consistent with his earlier comments that the European Central Bank cannot act in such a way unless a proper fiscal union is first set up.

Mr. Draghi’s comments have been received with horror.  The financial markets, which had somehow convinced themselves that a massive bond buying spree was on the way, have gone into a tailspin. Financial pundits ranging from Paul Krugman on the left to Jeremy Warner on the right have reacted with similar horror.  Ultra Keynesians such as Mike Whitney, Dean Baker and Mark Weisbrot have been talking darkly for some time of a sinister plot by the European Central Bank to use the crisis to impose orthodoxy and austerity on Europe.

This abuse of Mr. Draghi and of the European Central Bank is misplaced.  The European Central Bank has been able to buy eurozone government bonds up to now because it is awash with money that European banks have placed on deposit with it because they do not trust each other.  News today of the fragile condition of the big German banks with Commerzbank apparently in especially severe trouble shows what a brittle basis for a bond buying programme this is.  Since the eurozone was anyway always intended to be merely a currency union as opposed to a transfer union, even the existing bond buying programme is technically illegal and has already caused the resignation of a German member of the board. 

In the light of this it is not surprising that Mr. Draghi and the European Central Bank are so unwilling to implement the kind of bond buying programme that is being demanded of them.  As for Mr. Draghi’s earlier comments that the European Central Bank cannot do more without a fiscal union, followers of this blog will know that he is only talking sense.

Jeremy Warner in an article in the Daily Telegraph makes a comment that expresses perfectly the naivety that exists concerning the European Central Bank.  He says that following Mr. Draghi’s latest comments the markets are beginning to suspect that the European Central Bank is not a real central bank like the Federal Reserve Board or the Bank of England but is a mere “apparatchik”.  If that is what the markets think then they are of course right and not before time.  A mere “apparatchik” is precisely what the European Central Bank is and always has been.  Given that that is what its charter and the treaties say why do so many people persist in thinking otherwise?


At every twist and turn in the eurozone crisis we hear news of some cunning plan to solve the eurozone’s problems.  The latest plan is the so called fiscal union, which as I explained in a recent post is not actually a fiscal union at all.  Meanwhile the newspapers in feature articles and letter columns are awash with more such plans offered by various thinkers, pundits and economists.  I have long since lost count of the number of plans.

What all these plans have in common is their quite extraordinary complexity.  They remind me of the similarly complex plans of the 1920s such as the Dawes Plan and the Young Plan, which were designed to enable Germany to go on borrowing money whilst running a trade deficit so that it could continue to make reparations payments.  In the end all these plans failed and Germany defaulted on its reparations payments.  It is now generally acknowledged that what these plans instead did was weaken the financial system and help pave the way for the Depression.

Speaking for myself I am at a complete loss to understand the need for these plans or why the sovereign debt problems of some eurozone countries should have become a problem for the eurozone at all.  What would have been simpler when Greece ran into difficulties last year than for Greece to be told that since the eurozone is only a currency union Greece’s debt problems did not concern it and that Greece needed to resolve its debt problems by itself by talking directly with its creditors?  Possibly Greece might have defaulted but why should that have affected the euro?  Some of Greece’s creditors might have found themselves in trouble but given that all the relevant treaties and the repeated statements of the German government say that the eurozone is not a transfer union the creditors would in that case have had no one to blame but themselves.  If the creditors had gone bust then it would have been for the governments of the states in which they were based to decide what to do.  Any of the creditors that were banks could for example have been quickly nationalised with steps taken to protect their depositors.  If the banks had been allowed to go bust this would not have cost much money at all. 

If a Greek default had led to a contagion effect so that other eurozone governments were forced into default the same principle would apply.  Though even more banks might have had to be nationalised in the end the debts of the defaulting countries would have been written off.  Since the eurozone is only a currency union there is no reason why any eurozone state that had defaulted on its debts would have had to leave it.  There would have been no need to impose austerity on the defaulting states or large transfers on the remaining solvent states. 

It seems to me that the course I have just outlined would not only have saved everyone a great deal of time and trouble but is a great deal simpler than any of the plans proposed.  It also has the advantage of being the course that was originally envisaged in the treaties as well as being consistent with the prevailing free market economic philosophy of our times.  A large number of bankers would have lost their jobs and their shareholders would have lost their money but given that they foolishly lent money on the assumption that the eurozone is a transfer union when the treaties clearly say otherwise they would have had no one to blame but themselves.  Isn’t accepting responsibility for one’s mistakes what capitalism is supposed to be about? 

Instead we have a never ending succession of plans.  Perhaps some genius somewhere will come up with the plan that works.  Or possibly, in the spirit of Mr. Micawber, something else will turn up.  I suppose we will have to wait and see.


Last week the US Federal Reserve Board announced that it would help liquidity by making dollars available to other central banks.  This announcement followed days of speculation that the Federal Reserve Board was about to ride to the rescue of the eurozone possibly by buying eurozone government bonds.  The Federal Reserve Board’s announcement triggered a wave of buying in the international money markets, which continued until Friday.

On the face of it all this is baffling.  As Paul Krugman for one correctly says in his blog the Federal Reserve Board merely announced that it would do what it routinely does anyway.  Given that this is so it is unclear why the Federal Reserve Board felt the need to announce it.  As for the idea that the Federal Reserve Board might buy eurozone government bonds, at a time when the US government is struggling with its own deficit this would be impossible if only for political reasons.

Over the last day or so I have however heard a rumour, which might explain the mystery.  This is that the Federal Reserve Board’s announcement was made to provide cover for an international bailout of a major French bank, which was on the brink of collapse. 

I do not know whether or not this rumour is true.  I do however remember how similar rumours were circulating in the summer of 2008 about problems at a US bank.  The eventual collapse of Lehman Brothers showed that those rumours were true.


The other piece of economic news that appears to have cheered financial markets today is information that US unemployment has fallen from 9% to 8.6% with 120,000 new jobs being created in November, which has been interpreted as a sign of a strengthening of the economic recovery in the US.

Alas these figures do not mean what they appear to mean.  Whilst 120,000 jobs were indeed created in November the reason for the decline in the unemployment totals appears to be largely statistical.  US unemployment figures measure the number of people who are unemployed and looking for work.  It seems that the major reason for the seeming improvement in the unemployment figures is that 315,000 people who were previously looking for work in November stopped doing so.  If they stopped doing so because they have given up hope of finding work then the latest figures may actually be pointing to a deteriorating picture.  It seems that such a sharp fall in the number of people looking for work is very unusual, which suggests that the more pessimistic interpretation may by the correct one.  If so the financial markets have misunderstood the figures and have been cheered by figures that are actually turning bad.

I understand that the US Department of Labor, which publishes the US’s unemployment figures actually publishes another set of figures, which attempts to show the proportion of the total available workforce, which is not working.  These figures, which on the face of it seem more accurate, suggest that the true rate of unemployment in the US is actually  around 15%.  I have even read somewhere that if unemployment today were calculated in the way that it was in the 1930s it would come to around 25% or a quarter of the workfrorce, roughty what it was at the height of the Depression.  That may be going too far.  Differences in the labour market between then and now are so great that such comparisons seem to me dubious.


There has been huge excitement in the world financial markets at talk of the eurozone establlishing a fiscal union to supplement its monetary union. 

This excitement is misplaced.  What is being proposed is not a fiscal union even though that is what the German Chancellor and the French President are calling it.  A fiscal union is where there is a single government with a single finance ministry or treasury deparment, a single budget and a single tax system.  It requires a unified political and administrative structure with a single tax collection service that is able to collect taxes across the entire eurozone and prosecute defaulters. 

What is being proposed bears no relation to any of this.  Instead there is to be another EU treaty supposedly setting out unified tax and spending rules that are to be administered by the eurozone states.  Since there will be no eurozone government (the French President ruled that option out) the levels of tax and spending in each eurozone state in each budget period will presumably have to be negotiated between all the eurozone states.  One shudders at the thought of the conflicts to which this will give rise. 

Supposedly there will be fixed financial penalties imposed if the rules are then broken.  Since the eurozone will not have a government with powers of coercion over its members It is completely unclear how these penalties will be enforced.  The Maastricht Treaty already sets out rules for the eurozone specifying a limit on budget deficits of 3% of GDP and a limit of 60% of GDP for public debt.  All the major eurozone states have broken these rules.  Germany”s public debt currently stands at 84% of GDP.  No penalties have however been imposed for breach of these rules since in the absence of a eurozone government there is no one to impose or enforce such penalties. 

The proposed solution anyway addresses the wrong problem.  As has been repeatedly and correctly pointed out by such people as Paul Krugman and Dean Baker the problem in the eurozone is not profligate governments.  Until the financial crisis broke all eurozone governments except Greece had kept their spending under tight control.  This was the case in Spain, Portugal, Italy and Ireland.  Spain’s budget deficit and its level of public debt were lower than Germany’s. The problem in the eurozone is not profligate governments but a broken banking and credit system aggravated by structural trade deficits between eurozone states that were masked until the arrival of the financial crisis by heavy private lending by eurozone banks.  It was only when the weakness of the European banking system became clear following the start of the financial crisis in 2007 and 2008 that sovereign debt mushroomed and became an issue.

If the eurozone states want to create a fiscal union to support their currency then they must face up to the reality that this is only going to happen if and when there is a full political union as well.  This means a single European government elected by direct elections.  In the meantime what is being proposed not only fails to address the underlying problems of the eurozone but by creating more sources of conflict is going to make them worse.


In the light of the public sector strike today I can do no better today than to repeat the post I wrote on the day of the last public sector strike in June:

I find most of the press and political commentary with its scapegoating of public sector workers frankly offensive.  It seems that much of the political class (which includes the journalistic community) rather than address the real problems in the economy, which are to be found in the financial and banking system, are intent instead on waging a class war against the country’s most dedicated workers most of whom are absurdly low paid for the work they do. 

Public sector workers are in no sense responsible for the present crisis and have had to face wage and recruitment freezes for almost as long as I can remember.  A friend of mine who works in a critically important department of the Revenue, which deals with tax fraud, told me today that because of a wage and recruitment freeze that has been going on for years the staff are not only absurdly overworked and underpaid but also do not include a single worker under 35 so that when the current workforce retires there will be no one with the knowledge or experience to take its place.  Two other friends of mine, who have the critically important jobs of teaching in universities, work in a profession where wages have stood still since 1970 so that real incomes have steadily fallen.

Let me say it clearly that the work that public sector workers do is the toughest, most necessary and most underappreciated that is done in the country.  If public sector workers were permanently to withdraw their labour the entire country would come to a stop in a way that is true of no other group of workers.  Public sector workers are not responsible for the economic crisis.  It is beyond unfair that they should be expected to pay a disproportionate share of the burden now that things have gone wrong especially when those who caused the crisis continue to be so grotesquely over rewarded in spite of what they have done.  Speaking for myself but also I think for many others I say that the public sector workers who are striking today deserve full support in their strike and from me at least they have it.